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Not good news for Japan as deflation claws its way back

DEFLATION is clawing its way back in Japan, and that's not good news for an economy trying to recover from its worst recession since World War II.

Japan's key consumer price index tumbled at a record pace in May, the government said yesterday. The core nationwide CPI, which excludes volatile fresh food prices, fell 1.1 percent from the previous year in the third straight month of decline.

The result marked the biggest fall since the government began releasing comparable data in 1971.

Japan appears to be "heading for another lengthy period of deflation," said Richard Jerram, chief economist at Macquarie Securities in Tokyo.

Lower prices may seem like a good thing, but deflation can hamper growth by depressing company profits and causing consumers to postpone purchases, leading to production and wage cuts. It can also increase debt burdens.

The drop in underlying prices is "set to be persistent" and can lead to various problems for companies and individuals because interest rates will "be too high for prevailing economic conditions," Jerram said in a note to clients.

Bout of deflation

Japan suffered a stabilizing bout of deflation during the 1990s, and again earlier this decade, when the world's second-largest economy struggled to escape from a real estate and banking crisis.

After the results, Finance Minister Kaoru Yosano expressed concerns about a sharp slowdown in demand.

"We continue to monitor price movements, and need to carefully implement economic management to avoid ... a deflationary spiral," Yosano said at a news conference, according to Kyodo news agency.

With crude oil prices down dramatically from record highs a year earlier, energy and transport prices fell sharply in May. Fuel, light and water charges dropped 3 percent, and private transport costs tumbled 9.2 percent.

But analysts point to the 0.5 percent dip in so-called "core-core CPI," which excludes food and energy, as a more troubling sign of weakness in underlying prices.

Prices for household durables fell 4.9 percent, and those for clothing slipped 0.5 percent.

The core CPI for Tokyo dropped 1.3 percent in June, suggesting that prices nationwide are headed further south. Prices in the nation's capital are considered a leading barometer of price trends across Japan.

The Bank of Japan, the central bank, predicts that prices will keep declining for at least two years.


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